Tag Archives: institutions

Ethics, culture and economics

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It was thought-provoking reading Deirdre McCloskey’s Beyond Positivism, Behaviorism and Neoinstitutionalism in Economics right after Jamie Susskind’s Digital Republic. They’re about different subjects of course, but also have contrasting philosophies. The Susskind book points to more government action, much more, in shaping digital markets, and I agreed with some – althoug not all – of his suggestions. McCloskey is concerned to make the case against the frequently-heard kind of analysis that market failure X requires government action Y to fix it. And I sort of agree with her too. Am I just hopelessly inconsistent?

To take a step back, this book has three messages. One is that it’s incorrect and misleading of economists to claim – as so many of us always do – that the positive and the normative can be separated, and all we’re doing is the objective, evidence-based analysis. In this section the book targets a 2017 paper by Werner Erhard and Michael Jensen that I haven’t read but sounds philosophically naive. For a little reflection – really only a little – shows this to be false: if we’re recommending an action for its good outcomes, ‘good’ is an inherently normative, evaluative criterion. I wholeheartedly agree with McCloskey on this point and wish I’d been able to read this book before writing those sections of Cogs and Monsters.

McCloskey’s second point is to argue for a broader, multi-dimensional, humanities-inflected approach to economic analysis. She takes particular aim at ‘neoinstitutionalists’ from Douglass North to Daron Acemoglu for their reductionist view that economic institutions are wholly described by incentives and utility-maximising outcomes, arguing that standard economic models alone are insufficient for explaining modern economic growth. Her own view – set out in her major Bourgeois virtues trilogy – is that a change in culture toward liberal (in the old-fashioned sense) ideas are needed to explain the scale of change between 1800 and now. Changes in incentives bring small (Harberger-triangle sized) gains, not increases in incomes by many multiples. I’m on board with this too, while still thinking the economic max-U approach brings interesting and useful insights.

Her third aim, though, is to argue for a more libertarian public philosophy: governments mess up economies more than they fix problems, and policies had little to contribute to the massive growth of the past 200 years. Here is where I diverge. For sure there have been many government failures too. Indeed, markets and governments tend to fail in the same contexts and for the same reasons (natural monopoly, externalities, incomplete markets etc). But I disagree with her implied counterfactual that there would have been an even more massive improvement in living standards in the era of modern growth without government. Collective action problems need collective action even if the location of the need shifts over time with technology, or with the complexity of high fixed-cost markets characterised by technological or other uncertainties, or with social expectations. So yes, there are a lot of simple-minded government-can-fix-it proposals – on this point McCloskey takes aim at Mariana Mazzucato‘s claim that the government in effect brought us the smartphone, albeit caricaturing it somewhat. But I’d contend we’ve of late had too little market-shaping policy rather than too much – including in digital domains.

Some of the terrain will be familiar to McCloskey’s readers – the importance of ethics in economics, of culture in growth, the misleading cult of statistical significance. I enjoyed reading this book nevertheless – her style is a bit of an acquired taste and I like it although I know others don’t. And it’s a compact discussion of some crucial issues economists should be contermplating. Even where I disagreed, it made me think.

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Profit and time

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Avner Offer’s new, shortish book Understanding the Private-Public Divide: Markets, Governments and Time Horizons is superb. It sets out a persuasive argument for locating the boundary between private and public production in terms of the payback period for investment. The book starts: “In economics… the present is all there is. Past costs are sunk and can be ignored. The future is only what we make of it today.” What if we take seriously the need to invest for the future? As he points out, government accounts for 30-40% of GDP in most rich countries, and when you add in non-profit and household production well under half of economic welfare is produced on a for-profit basis – and that couldn’t happen without government-provided infrastructure or other support such as franchises or patents.

The central point is that for-profit investment needs to pay off in a relatively short period: “The higher the rate, the shorter the wait.” The prevailing interest rate defines a unique break-even period. Private markets can produce efficiently if the pay-off period is shorter. Otherwise, government has to act as the “commitment agent for society.” When it steps back from this, delegating to private agents, corruption is often the result, or else the enrichment of managers and shareholders at the expense of workers and consumers. There are no grounds for expecting efficiency gains – quite the contrary.

Offer writes: “There is no warrant for extending market norms to the rest of social activity, to the family, government, infrastructure, education, healthcare, science and arts, social insurance, old age, defence, protecting the environment and climate. Together, these are the source of most economic welfare.” He adds, for good measure, that much financial sector activity serves no social purpose.

Stirring stuff. The chapters set out the basic economic argument about credit time horizons, and then discuss the ethical and political consequences of governments delegating long-term activities to the private sector. Subsequent chapters discuss specific issues – housing and climate change.

When you add to the mix the well-known Herbert Simon point (in his 1991 Journal of Economic Perspectives article Organizations and Markets: “The economies of modern industrialized society can more appropriately be labeled organizational economies than market economies.”) about the limited scope of the market within private enterprises, it seems hard to understand how we’ve been through the past 40 years of markets-first political philosophy and practice.

Avner Offer has delivered a bracing counterblast to this. His main omission is non-market, non-government economic activity, civil society and the household (hence my book was Markets, State and People). But that would have been a different book. Highly recommended.

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Co-operation vs sovereignty in an unequal world order

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Global governance is understandably something of a preoccupation as economic globalisation seems to be in retreat at the same time that the scale and intensity of global challenges – climate change, the AI race, actual or simmering conflict, organised crime – is increasing. The Bretton Woods institutions – IMF and World Bank – established in the wake of World War Two remain important and powerful, and will have a lot on their plates in the next year or two, including the possibility of a new debt crisis alongside a surge in poverty and hunger. This context raises two questions. One is what is their guiding philosophy in terms of economic analysis and policy recommendations going to be now the old Washington Consensus version of conditionality has been more or less ditched? The other is whether they can help address the new kinds of challenges, or whether instead new institutions are needed?

They were forged out of a crisis of course, but in The Meddlers: Sovereignty, Empire and the Birth of Global Economic Governance Jamie Martin traces their forbears in the international economic institutions established near the beginning of the 20th century. The key issue he highlights is on the one hand the delicate balance between mutually beneficial co-ordination and voluntary loss of sovereignty among peer countries, and on the other the exercise of power by some countries over others (Imperial powers over colonies or later the US over its debtors) at the expense of the latters’ sovereignty. Co-ordination and co-operation require ceding some decision-making ground but when there is a parity of power this expands the opportunities or benefits each party experiences. However, the international institutions also embed inequalities of power – symbolised by the Asian crisis image of an IMF bureaucrat (Michel Camdessus) leaning over a local politician (Indonesia’s President Suharto) signing up to loan conditions.

Some technocratic institutions governing for example international post or shipping have lasted throughought the century plus, while the BIS (established in 1929/30) is an interesting example of an organisation with a broader mandate yet lasting throughout the 20th century and beyond, despite its missteps during the 1939-45 conflict. Other pre-WW2 international bodies such as the Economic and Financial Section of the League of Nations fell with the implosion of the international order at the outbreak of war. The book argues that the context of post WW1 reparations, the tensions in the European empires, the growth of US economic power and the pressures of the gold standard and the tariff wars of the 1930s all contributed to their downfall. International co-ordination was both essential and impossible.

The lesson for the 21st century, it concludes, is that today’s context of shifting economic power and economic crisis pose similar challenges for the Bretton Woods institutions. The history of earlier institutions suggests that it is fundamentally hard to resolve the core dilemma of a need for co-operation with the desire for sovereignty in a world of unequal power: “Tweaks to existing international institutions, like the IMF and World Bank, may be insufficient to produce a more stable reconciliation of global governance and democratic politics.” But what form should new institutions take? This very interesting book leaves the question hanging.

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Governing badly in a crisis

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I’ve now read Jeremy Farrar’s Spike: The Virus vs the People – the Inside Story, as a follow-up to Vaxxers, and found it also very interesting. It’s less gripping as a personal memoir, although it does track his own involvement in pandemic policy via SAGE (in the UK) and WHO and other international organisations. On the other hand, it is enlightening as an insight into the dysfunctionality of decision-making in the UK & in this way is a companion to Michael Lewis’s Premonition about the US pandemic lack-of-preparedness. Farrar writes: “Many of the UK’s biggest successes during the pandemic were achieved by teams working outside formal government structures and agencies.”

We will (eventually) have an inquiry into the handling of the pandemic by the Westminster/Whitehall and devolved governments but reading Spike makes it clear that any debate about the future governance of the UK or about co-ordination between levels of government within England and the other nations absolutely needs to include lessons from the pandemic. My starting hypothesis will be that across countries there will be a strong correlation between eventual excess death rates and the competence of government, the state’s ability to co-ordinate in a crisis. The pandemic has exposed fragilities of governance.

Formal structures of government are one thing. Another message I took from Spike is the importance of personal relationships and the serendipity that introduces: “I thought, probably like most people, that the world works through official or formal channels but much of it operates through private phone calls and messaging apps.” This absolutely speaks to my bias that as soon as possible we should get back to conferences and in-person meetings. The nature of online communication is such that it excludes much exchange of tacit knowledge or small bits of information, not to mention trust-building.

The book has unflattering things to say about a number of people involved in pandemic response, not least some leading politicians; and praise for the dedicated scientific leadership. There are clearly different accounts (from the political and SAGE sides) about who said what when at key stages, particularly summer into autumn of 2020, which I guess an inquiry might get to the bottom of; Spike should perhaps be subtitled ‘an inside story’. The pandemic is not over either, and your ranking of which countries did worst will depend on your metrics: case numbers, cumulative deaths, cases and economic hit combined. Unfortunately the UK does not do well on any of these: something for us to ponder.

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Experts and values

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What is the scientific method? How does science advance? Why did modern science emerge when it did about 300 years ago? Will it continue? All questions addressed by Michael Strevens’ interesting and enjoyable The Knowledge Machine: How an Unreasonable Idea Created Modern Science.

The book begins by setting out two competing theories about the scientific method: Popper’s claim that scientific knowledge progresses through falsfication of hypotheses and Kuhn’s even more famous claim that it occurs through revolutionary changes in paradigm. These are incompatible explanations – if falsfication happened, how could scientists hold on to an incorrect paradigm – and both wrong, the book argues. The falsfication hypothesis not states that ‘facts’ are only tentatively true, always vulnerable to falsification – so we can be no more confident that the sun will rise today (Hume’s induction problem) than that a human born today will live forever. The paradigm revolution hypothesis seems to rule out progress or at least doesn’t account for why the scientific community jumps from one paradigm to another with better predictive power. Strevens is even more critical, though, of the radical subjectivists who argue that there is no scientific method, that science is fundamentally all about the status of scientists, how they exercise power within the scientific institutions so that certain ideas come to dominate.

It is not that scientists are not subjective, he says; of course they have personal priors in evaluating evidence. However, the key point is that in the official public discourse in scientific publications and seminars is that there is an iron rule: only empirical evidence with predictive power counts. The evidence will often be microscopic or concern minute differences in measurement: much scientific endeavour is super-dull, detailed collection of measurement. Scientists have to be trained to have a high tolerance for this painstaking work, because it is the only way progress happens – much as in their private lives they are fascinated by the big philosophical theories or the beauty of the universe. In scientific debate, “Victory does not come through smooth rhetoric, metaphysical inquiry, moralizing, or any other sort of sweet talking or big thinking. To win, players must front up with meticulous observations.” The subjectivists, the book argues, overlook this actual scientific method – which was cemented as the way to do science by Newton.

Is this immensely successful scientific method secure? The book ends with a section on the need to retrain every genertion of scientists in this approach – dull meticulousness in disciplinary debate whatever their private philosophical flights of fancy. And on the need to sustain the institution of modern science in the face of the challenges facing humanity today, from covid to climate.

It’s a very enjoyable book, with plenty of stories of science past and present. The argument certainly persuaded me. Economics differs substantially in that the social processes we investigate do not generate data in the same way as physical or biological ones, but the ideal method is the same: of course we bring our own values to evaluating evidence but it is the evidence that wins the official disciplinary debate. We cannot ultimately be objective and impartial but we can and should set objectivity as the standard for evaluating claims. So I recognised the book’s description of the iron rule as the way researchers (try to) operate. And similarly, I reject the subjectivism of those who say economics should be pluralistic – can only be so – because there is no way of testing claims against each other.

419TbK7hZPL._SX323_BO1,204,203,200_My other reading this week has been Behold, America by Sarah Churchwell. Having been comforted by the arrival or President Biden, the book got me worried all over again about the long and strong roots of American fascism – shocking and startling photos of the swastika flying in Madison Square garden rallies. The book analyses the histories of the slogans America First and the American Dream – tracing the more-or-less constancy of the first (white supremacy) and the evolution of the second (from an evocation of equality and civic participation to a claim about material prosperity) through newspapers and other records. Along with this evidence about the persistence of populism, perhaps we should stay worried.

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